Invest in Real Estate with a Self-Directed IRA

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Contributor, Benzinga
July 27, 2023

Did you know that it’s possible to invest in more than just stocks, bonds and mutual funds through your individual retirement account (IRA)? With a self-directed IRA, you can diversify your investments with precious metals and real estate purchases. In some cases, using your existing IRA funds to invest in property can create a profitable stream of retirement income with a few unique tax benefits.

Investing through a self directed IRA can be a complicated process. Our guide will help you determine if this investment is right for you and how you can get started. 

Best Self-Directed IRAs for Real Estate

Best for Individual Investors Seeking Tax-Advantaged Accounts: Equity Trust IRA

With over 200,000 accounts with more than $30 billion in retirement assets, Equity Trust Company (ETC) is the oldest and undoubtedly the largest SDIRA company. A combination of its extensive experience, long history in the industry, well-rounded investment offerings and specialist support system qualifies it as Benzinga’s best SDIRA company.

ETC initially started as an SDIRA company that offered real estate investment options about 45 years ago. Now that the firm has branched out, you can also invest in tax lien certificates and all forms of real estate, meaning that you can better enhance your portfolio and move into the markets in which you prefer to invest.

Moreover, the company provides unique educational and specialist tools to assist clients in making informed decisions about their investments.

Yes, you will need to direct the platform on the investments you prefer to take, but it’s still a powerful hub for retirement portfolio management. Plus, there are over 400 specialists ready to help you execute transactions means you needn't worry.

Pros

  • You can receive support from specialists in the field
  • You can invest in unique items like tax liens
  • You can also learn about alt investing on the platform before starting

Cons

  • Some of these alternative investments may seem too complex for certain investors

Best for Audit Protection: IRA Financial Group

IRA Financial is an SDIRA company that provides audit protection for SDIRA investors. SDIRA investors frequently come under scrutiny from the IRS because of the types of transactions they carry out. With IRA Financial, you don't have to worry about scrutiny and audits from the IRS.

According to its policies, the firm's group of tax specialists is always ready to back you up. This means that you can reach your contribution limit, invest in a REIT or investment property, fully understand the tax implications of these investments and receive support on the backend when needed.

However, auditing protection is only icing on the cake. At its core, IRA Financial offers a checkbook IRA to investors. This feature allows access to a spectrum of alternative investment options, including real estate, private loans, precious metals, foreign currencies and cryptocurrencies. Furthermore, as an investor, you have access to many educational resources and investment guides that fast-track your understanding of various investment types.

What does this mean for you? It means that you can invest in real estate using your retirement funds and mix those investments with other funds, if you like.

Pros

  • Audit support is one of the best things any financial operation can offer you
  • You can buy into real estate in the fashion that works best for you

Cons

  • While you have checkbook control, remember that there are specific rules governing how you manage certain alt investments

Best for Real Estate Investing: uDirect IRA

Founded by real estate expert Karen Hall, uDirect IRA broke into the SDIRA space in 2009 as a real estate investment alternative. Although the company has since branched out to support alternative investment options, it still maintains its real estate superiority. 

uDirect IRA offers checkbook control if your retirement plan as you invest in private loans, closely-held companies, accounts receivable financing, legal settlements and precious metals. Plus, uDirect only charges a $35 transaction fee, allowing you to keep more money in your account—with your first six transactions being totally free. The SDIRA company emphasizes a learn-and-earn attitude by hosting webinars and providing educational tools or resources related to investment. These help you learn how to manage your SDIRA and succeed with your retirement investing.

Pros

  • Buying into real estate can easily help you make more money from your retirement funds
  • Low transaction fees help you save even more money as you plan for retirement

Cons

  • Remember that this platform offers unique investment opportunities, but it may not offer the level of customer support that you would like for certain assets

Best for Experienced Investors: Rocket Dollar

Founded in 2018, Rocket Dollar is a relative newcomer to the SDIRA community of custodians. That notwithstanding, though, the custodian has already made its mark and is poised to continue growing. Its easy-to-use services and vast investment options strengthen its ability to compete with the best.

Although the company charges a relatively higher administration fee, its advantages, especially for investors with an extensive portfolio, make up for the costs.

For example, a Rocket Dollar SDIRA account with $300,000 assets and another with only $20,000 assets will both be charged a $360 one-time setup fee and a $15 monthly administration fee for the core plan. Therefore, for investors with large portfolios like IRA rollover accounts or SEP IRAs, Rocket Dollar's SDIRA may be the most cost-effective. Why? Because, all the setup fees are the same, so you might as well go in with more cash on this platform.

Depending on your subscription plan, the firm's framework will automatically set up a checkbook LLC for you when you register. For all plans, though, checkbook LLC offers access to standard alternative investment options like real estate, private equity, precious metals and cryptocurrencies. Plus, customer service is readily available through the RocketDollar.com dashboard.

Pros

  • You can save quite a lot of money on fees when setting up your accounts
  • The administration fees are so low that they work for just about anyone

Cons

  • Remember, you may not want to invest in certain things like precious metals here when you can also buy real gold, silver, etc.

How to Invest in Real Estate with an IRA

You cannot invest in a property with any type of IRA. Our guide will help you understand the process of setting up a self-directed IRA and investing in property using your IRA funds.  

1. Convert Your IRA to a Self-Directed IRA

You should already understand the IRA investing process before you convert your account to a self-directed IRA. If you don’t already have a traditional or Roth IRA, set it up and start making contributions before you consider investing in a self-directed IRA.

If you already have an established IRA, you’ll need to choose a custodian to service your self-directed IRA. A custodian is a financial institution that handles tax reporting and other required documentation for your IRA account. Each year, you must report your IRA’s holding to your custodian for tax purposes. After you choose a custodian that supports property investments in self-directed IRAs, open your IRA account and roll over your existing funds to your new account.   

2. Choose a Property and Purchase it Using Your IRA Funds

While you’re setting up your self-directed account, you can begin comparing properties for sale. You might want to hire a real estate agent or realtor to make your process simpler and more streamlined. Take a look at the current amount of money you have in your existing IRA and use it as a guide to determine how much “house” you can afford. Remember that home expenses (like title searches or improvements) must also come out of your IRA funds.

The easiest way to purchase property with your IRA is to pay for it in cash. However, you can use a partnership or undivided interest to purchase the property in some cases. You cannot use a traditional mortgage loan to fund the purchase.

Remember that you also cannot live in the home or gain any immediate personal benefits from the property you choose. When you compare properties, consider location, investment and potential rental income before you choose where to invest. When you find a property, submit an offer letter to the seller in the name of your IRA. If the seller accepts the offer, proceed with the transaction and put the name of your IRA on the title of the property. Your custodian will assist you in closing escrow on your property and titling it correctly. 

3. Decide How You Want to Use the Property

After the sale of the property closes, you’ll need to decide how you want to use the property. Remember that there are a limited number of ways you can use the property according to IRA rules. We’ll go over them in a later section.

Most investors who purchase a property using their self-directed IRA “flip” the home and put it back up for sale or rent the property out to tenants. If you decide to rent the property, any rental income must be returned to your IRA account. If you sell the property, the proceeds must go to your IRA. 

Must Know Tips for Investing in Property With an IRA

Investing in a property with your IRA comes with a number of rules and regulations. If you fail to adhere to these rules, your purchase could be disqualified from your IRA. This would make all of the money spent taxable. Be sure to take note of these rules before you decide that you want to add a property to your IRA. 

  • You cannot gain any personal benefits from the property. The most important rule for investing in property through your IRA is that you cannot gain immediate personal benefits from the residence. You cannot live in the home that you invest in as a primary or secondary residence or use it as a vacation home — that includes members of your family (if paying rent or not). If the property is a commercial space, you cannot operate a business from the property or rent any type of office space in it. The residence must purely be an investment to generate income through rent, appreciation or both, in the same way a real estate investment trust is just an investment you buy into. 
  • You cannot purchase a property from a “disqualified party.” In addition to how you use the property, IRA rules also dictate which properties you can purchase. You cannot purchase a property that you already own or a property that is owned by your spouse, your children, your parents and other family members. This is referred to as “self-dealing” and immediately disqualifies your investment from your IRA.  
  • The property must be owned by your IRA. Properties purchased using a self-directed IRA aren’t titled in your name. Instead, the property is purchased using the name of your IRA, which is also found on the title. This is the only way to gain the tax advantages you seek.
  • You cannot manage the property yourself. In addition to living in the home, managing the property yourself is also forbidden. You must pay for an independent 3rd party to manage the property if you have tenants and to perform any necessary repairs. This is why many investment choices should turn automatically to REITs or crowdfunding platforms.
  • You must pay for property expenses out of your IRA. In addition to hiring an independent party to manage and repair the property, you must also pay for any and all property-related expenses using the funds in your IRA. This includes repair bills, property taxes and anything else you spend maintaining the property as an income-generating investment. If you don’t already have enough funds in your IRA to cover these expenses, this can create problems and potentially disqualify your investment. 
  • You cannot use a mortgage loan to purchase the property. Most homeowners use a mortgage loan to purchase their primary residence with a small down payment, usually between 3% and 20% of the value of the home. According to IRA rules, you cannot use a mortgage loan to purchase the property in your portfolio.

This doesn’t necessarily mean that you need to purchase the property in cash — though this is how many account holders add properties to their IRAs. You can also use undivided interest in your IRA account and partner with another investor to purchase the property. In some rare instances, you can finance a property investment by using a non-recourse loan issued to your IRA, you’ll need to structure the loan properly and pay unrelated business income taxes on the amount that you borrow.  

Invest With A Real Estate Investment Platform

Purchasing a property directly isn’t the only way to add real estate investments to your IRA. There are a number of real estate investing platforms that allow you to invest in residential and commercial projects online through crowdfunding without the hassle of ensuring that you’re following all of the rules listed above when purchasing the property directly. This means that your investment decision is much smaller and far safer, but you are still playing the real estate market and diversifying your retirement savings account.

Fundrise, one of the most well-known and trusted real estate investment platforms, actually has its own IRA product. With a minimum investment of just $1,000, you can add a diverse portfolio of institutional-quality real estate assets to your retirement account. Learn more about the Fundrise IRA.

Browse a few of our other favorite real estate investing platforms below. They handle everything from the full investment portfolio to finding a property manager and everything in between so that you can maximize your retirement savings.

Pros and Cons of Self-Directed IRAs

Self-directed IRAs can be beneficial for some investors and a nightmare for others. Let’s take a look at the pros and cons of investing through a self-directed IRA. 

Pros

  • Tax benefits: Although a self-directed IRA operates differently than a standard IRA, it still offers many of the same tax benefits. Say you open a self-directed Roth IRA and invest in a property, any income deposited back into the account through rent or an appreciation after a sale will be tax-free when you withdraw it after retirement.
  • More control over your investments: If you’re a hands-on investor, you’ll appreciate the level of control your self-directed IRA gives you over your investments. For example, if you invest in a property through your self-directed IRA, you get to decide if and when you sell it, rent it out or make improvements to it.
  • Higher return potential: If you understand the stock market well and you have experience managing properties, a well-executed property purchase using your IRA can create a consistent stream of tax-free income. While a higher return potential isn’t guaranteed, self-directed IRAs have more potential for passive income generation. 

Cons

  • More complicated fees and paperwork: To stay within IRS rules, you’ll need to hire a custodian to assist you in the self-directed IRA setup and investment processes. This custodian will charge you an additional fee in exchange for services.
  • More rules related to your investments: If you buy property through a self-directed IRA, you’ll need to adhere to the myriad of rules related to management and use of the property. Violating these rules can make your entire investment taxable.
  • Expensive investments require capital: Investing in real estate is an expensive endeavor. You must already have an established IRA before you can consider investing in property through a self-directed IRA. If you don’t have enough money to cover maintenance, repair and renovation expenses in your existing IRA, this probably isn’t the best option for you. 

Transition to a Self-Directed IRA Right Away

Before you can consider purchasing property through a self-directed IRA, you’ll need to open and fund a standard IRA. Thankfully, getting started with a traditional or Roth IRA is easier than ever. You can look into real estate crowdfunding platforms that buy into apartment buildings and the like. Plus, you don’t need to hire a tax attorney because you’re buying into real estate for investment purposes and maintaining the tax benefits of an IRA.

If you aren’t sure where to begin, consider a few of our favorite IRA providers.  

Frequently Asked Questions

Q

Are self-directed IRAs safe?

A

Self-directed IRAs work just like a traditional IRA, but you can incur more risk because of the investments you choose. So, your money is protected by the administrator, but you could lose some of that money while investing.

Q

Is real estate a good investment?

A

Real estate can be a very good investment, but you must remember that not all properties have the same rental income potential or sales price. Choose wisely before investing your retirement funds on real estate.

Q

Can anyone use a self-directed IRA?

A

Yes, anyone can convert to a self-directed IRA, but you may need to choose a new platform to help you.

About Sarah Horvath

Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.

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